Left Radicalism and the Repudiation of Foreign Debt
Visiting a local library's free bin (where the library lets you get some free books and magazines), I happened to find an issue of an old radical Left newsletter-style 'zine, named Z, from 1988. Intrigued, I picked it up and read some of the articles over lunch.
1988, of course, was a very amusing time from which to be reading radical-Left articles. The Left had no idea what was about to happen to the Communist world over the next three years (we on the Right scarcely expected it) and so there is some major humor in reading a serious debate about the contributions to civilization of the great socialist experiment of the DDR (East Germany) and its possibly-glorious future (it was to collapse the very next year) or the long revolutionary future of Communist Nicaragua (which was to throw the Sandinistas out in the first elections, which took place a bit earlier than the fall of the DDR if I recall correctly).
I was struck though, reading an article about the revolutionary prospects for Mexico, by a hope that Mexico gain a left-wing regime that would repudiate the Mexican foreign debt. It made me think about the fact that one of the really big blind spots that the radical Left has to reality is that they do not understand the reduced value of time-deferred money: hence they consider all loans usurious and interest payments essentialy theft. To say that this makes them bad at formulating financial policy would be an understatement.
When a nation takes out an international loan, this is exactly the same thing as when you and I take out a loan. The only differences are (1) the size of the loan (millions to billions of dollars), (2) the need to specify the medium of repayment (which must take not only the fluctuation in currency values into account) and (3) the difficulty of collection should the debtor prove recalcitrant (collection in such a case may require war, and it's usually easier for the creditor to just write off the debt).
Now, if I borrowed $1000 dollars from you, promising to pay you in $50 a year interest in addition to $100 of principal, until I paid off the principal (to take a very simple loan structure which doesn't take into account compounding in either direction) and one year I decided I could not pay you the $150, would you be happy? No? How about if one year I decided that I shouldn't have taken out the loan in the first place and hence wouldn't ever pay you back? Are you even less happy? Thought so. That is what it means to "repudiate a debt."
Now, continuing our example, after I repudiate the debt to you, I go to you again and ask to borrow another $1000 on the same terms. Would you lend me the money? No? So I go to another guy (call him "Jeff") and ask to borrow another $1000. Jeff knows that I stiffed you. Will he lend me the $1000 on the same terms? Probably not. What happens if I really really NEED that $1000? Guess I'm outta luck.
Congratulations. You now understand why repudiating a debt is a bad idea.
But wait, some will point out. There are examples of nations which have repudiated debts but still get international loans. How could this happen?
Well, it happens because lending to poor-risk creditors is often a disguised form of trade or aid. I'll explain how this happens in simple terms.
Suppose that I then go to Jeff and say "Listen, Jeff. I really need that $1000. If you lend me the money, not only will I pay you back but I will also let you use my pickup truck on demand for the next year." And Jeff says "Yes." Clearly, Jeff has just rented my pickup truck by lending me the money. If we don't make a formal rental agreement, this has been a disguised rental. Substitue "let you use my pickup truck" for "let you deploy a regiment of my troops abroad" and you would have a good model for how a country which had proudly defaulted on its debt, namely Communist Cuba, was able to get foreign loans -- at least, for as long as the Cold War lasted.
Another possibility is the disguised aid payment, which is really a form of double-disguised trade. If Jeff lends money to a person whom he doesn't expect to pay him back, the Jeff is doing him a favor. At some point in the future, Jeff might expect a favor in return. Possibly a bigger favor, which is disguised interest.
But note that the debtor always gives up something in return for taking out the loan. Either he pays back the loan, or his credit suffers (he can't get more loans) or he has to yield something else, perhaps covertly, to compensate the creditor. The original creditor (the one the debtor stiffed) may never be repaid (Cuba never paid off its Batista-era foreign debt, nor did it compensate the owners of the property it nationalized) but the creditor winds up paying someone, in some sense. It wasn't free money, no matter what the Leftist radical economists (such as Che Guevera) might have imagined.
There is one way that a debtor can get away with it. Credit held by foreign countries, or organizations of foreign countries, with which one HAS GONE TO WAR is lawfully confiscated as enemy property. This is the way in which Hitler attempted to finance his 1930's rebuilding of Germany -- he took out loans from the Western Allied countries and then confiscated their credit with the outbreak of war in 1939-40. A variant of this is tribute, in which you threaten war unless one gets loans on unduly-favorable terms. This is what the Soviet Union did to Eastern Europe from 1945-89.
Both war and tribute have the disadvantage of pissing off the victims. They may seek revenge, and even get it: the Western Allies repossessed Germany herself in 1945, and the former Warsaw Pact nations have gone from Russia's most subservient satellites to America's most loyal allies, precisely for this reason.
Makes me glad to live in a country that isn't run by Leftist radicals who imagine that they can take out gigantic foreign debts that no one will ever have to repay at any point in the future. Oh, wait ...
1988, of course, was a very amusing time from which to be reading radical-Left articles. The Left had no idea what was about to happen to the Communist world over the next three years (we on the Right scarcely expected it) and so there is some major humor in reading a serious debate about the contributions to civilization of the great socialist experiment of the DDR (East Germany) and its possibly-glorious future (it was to collapse the very next year) or the long revolutionary future of Communist Nicaragua (which was to throw the Sandinistas out in the first elections, which took place a bit earlier than the fall of the DDR if I recall correctly).
I was struck though, reading an article about the revolutionary prospects for Mexico, by a hope that Mexico gain a left-wing regime that would repudiate the Mexican foreign debt. It made me think about the fact that one of the really big blind spots that the radical Left has to reality is that they do not understand the reduced value of time-deferred money: hence they consider all loans usurious and interest payments essentialy theft. To say that this makes them bad at formulating financial policy would be an understatement.
When a nation takes out an international loan, this is exactly the same thing as when you and I take out a loan. The only differences are (1) the size of the loan (millions to billions of dollars), (2) the need to specify the medium of repayment (which must take not only the fluctuation in currency values into account) and (3) the difficulty of collection should the debtor prove recalcitrant (collection in such a case may require war, and it's usually easier for the creditor to just write off the debt).
Now, if I borrowed $1000 dollars from you, promising to pay you in $50 a year interest in addition to $100 of principal, until I paid off the principal (to take a very simple loan structure which doesn't take into account compounding in either direction) and one year I decided I could not pay you the $150, would you be happy? No? How about if one year I decided that I shouldn't have taken out the loan in the first place and hence wouldn't ever pay you back? Are you even less happy? Thought so. That is what it means to "repudiate a debt."
Now, continuing our example, after I repudiate the debt to you, I go to you again and ask to borrow another $1000 on the same terms. Would you lend me the money? No? So I go to another guy (call him "Jeff") and ask to borrow another $1000. Jeff knows that I stiffed you. Will he lend me the $1000 on the same terms? Probably not. What happens if I really really NEED that $1000? Guess I'm outta luck.
Congratulations. You now understand why repudiating a debt is a bad idea.
But wait, some will point out. There are examples of nations which have repudiated debts but still get international loans. How could this happen?
Well, it happens because lending to poor-risk creditors is often a disguised form of trade or aid. I'll explain how this happens in simple terms.
Suppose that I then go to Jeff and say "Listen, Jeff. I really need that $1000. If you lend me the money, not only will I pay you back but I will also let you use my pickup truck on demand for the next year." And Jeff says "Yes." Clearly, Jeff has just rented my pickup truck by lending me the money. If we don't make a formal rental agreement, this has been a disguised rental. Substitue "let you use my pickup truck" for "let you deploy a regiment of my troops abroad" and you would have a good model for how a country which had proudly defaulted on its debt, namely Communist Cuba, was able to get foreign loans -- at least, for as long as the Cold War lasted.
Another possibility is the disguised aid payment, which is really a form of double-disguised trade. If Jeff lends money to a person whom he doesn't expect to pay him back, the Jeff is doing him a favor. At some point in the future, Jeff might expect a favor in return. Possibly a bigger favor, which is disguised interest.
But note that the debtor always gives up something in return for taking out the loan. Either he pays back the loan, or his credit suffers (he can't get more loans) or he has to yield something else, perhaps covertly, to compensate the creditor. The original creditor (the one the debtor stiffed) may never be repaid (Cuba never paid off its Batista-era foreign debt, nor did it compensate the owners of the property it nationalized) but the creditor winds up paying someone, in some sense. It wasn't free money, no matter what the Leftist radical economists (such as Che Guevera) might have imagined.
There is one way that a debtor can get away with it. Credit held by foreign countries, or organizations of foreign countries, with which one HAS GONE TO WAR is lawfully confiscated as enemy property. This is the way in which Hitler attempted to finance his 1930's rebuilding of Germany -- he took out loans from the Western Allied countries and then confiscated their credit with the outbreak of war in 1939-40. A variant of this is tribute, in which you threaten war unless one gets loans on unduly-favorable terms. This is what the Soviet Union did to Eastern Europe from 1945-89.
Both war and tribute have the disadvantage of pissing off the victims. They may seek revenge, and even get it: the Western Allies repossessed Germany herself in 1945, and the former Warsaw Pact nations have gone from Russia's most subservient satellites to America's most loyal allies, precisely for this reason.
Makes me glad to live in a country that isn't run by Leftist radicals who imagine that they can take out gigantic foreign debts that no one will ever have to repay at any point in the future. Oh, wait ...